Three key issues facing Justin Trudeau’s government in 2021

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Donald Trump will leave the White House. COVID-19, we all hope, will be beaten by vaccines. For leaders in Canada and around the world, 2021 is a year of aftermath, likely to be consumed with daunting immediate priorities like digging out of recession.

But there are other defining issues coming at us just behind them, the kind of things that will shape this country and the planet over the next decade, and that can’t be entirely avoided in 2021.

There are tectonic shifts that now seem to be accelerating toward us, including the rise of Chinese influence, the shift of the economy onto the internet and the implications of efforts to decarbonize the global economy.

So while Canada’s political leaders will have to debate what to do about public health and debt and carbon taxes and boosting the economy out of recession – probably in a federal election in 2021 – they’d be wise not to ignore other big questions that are coming soon. Here are three:

An alliance on China?

Canadians don’t have to look into the future to see what might come from a rising China that strong-arms less powerful countries. Their compatriots Michael Kovrig and Michael Spavor have been imprisoned for more than two years in China, in transparent retaliation for the arrest of Huawei executive Meng Wanzhou on U.S. charges.

But there is a glimpse a little farther into the future in Australia. China has blocked Australian coal imports, despite a 2015 trade agreement. Beijing is mad, and we know that because the Chinese embassy in Canberra distributed a list of 14 demands for Australians to comply with if they want good relations, including reversing a ban on Huawei equipment in 5G telephone networks.

When the European Union put together a tougher policy declaring China a “systemic rival,” some EU members with economic ties – including Greece, whose main port, Piraeus, is owned by state-owned Chinese shipping giant, China Cosco Shipping – worked to block it.

China uses its influence over small nations, and intimidation, to divide and dominate. That requires a response beyond rhetoric. So will countries get together to stop China from twisting arms one at a time?

U.S. president-elect Joe Biden has proposed a common front. The United States is probably the only country that can lead such an effort, and get others to join.

The trick is that such a bloc can’t rely solely on the Americans. It will, by definition, require smaller countries to agree to respond when China uses trade as a political weapon or takes foreign hostages – even if it means Beijing might try to single them out for punishment to break up the alliance.

Taxing internet giants

It seemed like a populist consumer issue when then-PM Stephen Harper campaigned in 2015 against a “Netflix tax,” and Justin Trudeau rushed to say he would never impose one, either.

Now countries around the world are scrambling to figure out ways to tax internet giants such as Netflix, Facebook, Google and Amazon – and worrying that the shift of the economy onto the internet might make their tax base evaporate into the cloud.

The Netflix tax that Mr. Harper campaigned against was actually the GST. Amazingly, he was arguing that foreign companies remain exempt from a tax their Canadian competitors must charge. Mr. Trudeau – at the time – agreed.

Now the global economy is increasingly and obviously based on intangibles that don’t have to be shipped through customs. Countries that don’t apply sales taxes to foreign digital services might one day have much less left to tax. Last month, Finance Minister Chrystia Freeland said Canada will start to apply the GST on such sales.

But there is still a lot more of this issue to grapple with.

In a digital economy, countries increasingly worry they will not be able to tax corporations on profits as they beam services over borders from low-tax jurisdictions. France tried to stop the gap by charging a 3-per-cent tax on the French revenues of companies including Google or Netflix. U.S. President Donald Trump, considering them American companies making American profits, threatened a trade war. Negotiations at the 37-nation Organization for Economic Co-operation and Development on how to divvy up tax jurisdiction over international digital giants stalled.

Now Canada is preparing to do the same kind of thing as France, levying a tax on digital revenues starting in July. It’s not clear how Mr. Biden will respond.

But there are clearly two forces in conflict. Countries around the world now fear corporations will increasingly escape their tax jurisdictions. But if each imposes taxes of its own design, without an international agreement, the taxes can be used as protectionist barriers and become fuel for trade wars.

Carbon Clubs and Carbon Wars

The domestic political fight over carbon taxes and climate change is still being fought in Canada, but the international rivalries won’t be far behind.

In Canada there is debate over how much has to be done at a reasonable cost. On the world stage, countries are starting to think about how they can charge other countries for not doing enough to decarbonize their economies.

The European Union is already working on proposals for border adjustment tariffs, which would impose tax on imports made with a lot of carbon in a bid to prevent their companies from losing out to competitors who don’t face similar emissions-reduction costs.

In the U.S., which doesn’t have stringent national climate-change measures, there are already several border-adjustment proposals knocking around Congress, and Mr. Biden has endorsed the concept.

The divided U.S. Congress is unlikely to move quickly on climate change, but one can see why border adjustments might have bipartisan political appeal: They shift the costs of decarbonization from domestic companies to foreign ones.

It’s not simple, however. For one thing, consumers end up paying for some share of tariffs.

And border adjustments are so complex it is impractical to accurately account for the amount of carbon in, for example, a specific car. They’d have to be blunt instruments, applied to say, all steel from India. The EU would probably prefer to have more countries in the same carbon club – like the U.S., Britain, and Canada – and apply the tariffs only on countries outside the club.

There is another big problem, though: The EU hasn’t been able to figure out a way to apply border adjustments without breaking World Trade Organization rules. New tariffs are barred as protectionist measures, and imposing them allows countries to retaliate with their own trade measures. But if countries start to see decarbonization as imperative, they might put carbon clubs ahead of those rules.

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